It is all obvious or trivial except…

On the Tobin Tax

There\’s some very messy thinking indeed around this idea of the Tobin Tax:

Downing Street was keen to point out that the prime minister is not in the business of throwing sand in the wheels of capitalism, but his speech, with its talk of the \”social contract\” between finance and the people breaking down, did make clear that it would be partly about taming the money men.

Of course, the Tobin Tax was originally designed specifically and exactly to throw sand into the wheels of capitalism. James Tobin actually told us so.

American economist James Tobin originally proposed the tax – levied at up to 1%, on foreign exchange transactions – in the 1970s, to tame damaging financial speculation, and throw \”sand in the wheels\” of turbo-charged capitalism.

Quite, and there was a very specific reason to: it was a world of fixed exchange rates. What he wanted to do was preserve the rigidities of the Bretton Woods settlement, to make it possible for countries to pursue independent economic policy paths without having their (fixed rate) currencies coming under attack and thus forcing them to change those policies.

We don\’t have fixed currency rates now, so the case for the Tax has largely gone.

Calculations by the Austrian government, which is keen on a transaction tax, showed that even if the number of deals fell by up to 65% as the fee dissuaded people from unnecessary trades, it could still raise $700bn (£420bn) a year.

Isn\’t that a lovely formulation? We now have the Austrian Government making the decision about whether my trades on the currency markets are necessary or not? As just a very minor example, my income is variously in $, £ and €. My expenditures are similarly, variously in $, £ and €. Incomes in one corrency rarely match with outgoings in that same currency so there\’s a certain amount of shufling things around month by month. But according to the Austrian Government I should be taxed because, umm, well, apparently I\’m some bastard international bank who deserves to be screwed.

And the biggest reason why this is all nonsense?

There are three main reasons a transaction tax suddenly has mainstream appeal. First, there is intense public pressure, after the taxpayer-funded bailouts of banks, for the financial sector to pay something back to society. Governments have struggled to exert any control over bankers\’ bonuses: by levying a tax on their risky activities, they can grab some of the banks\’ profits directly.

You can levy a tax wherever you like. But just because you levy it somewhere doesn\’t mean that that\’s where it stays: there is this thing called tax incidence.

And as the report says, we do have a transaction tax on financial transactions in the UK: Stamp Duty on share transactions. And who actually bears the economic burden of that tax? The wheelers and dealers? Actually, no: a report back in 2002 pointed out that it was individual\’s pension funds that bore part of the brunt, the other major effect being a rise in the cost of equity capital to UK based firms. And as we know, a rise in the cost of capital shows up in the workers\’ paycheques as a reduction in them.

So far from a Tobin Tax screwing the bankers, it, once again, screws the workers.

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9 comments on “On the Tobin Tax”

“Quite, and there was a very specific reason to: it was a world of fixed exchange rates. What he wanted to do was preserve the rigidities of the Bretton Woods settlement, to make it possible for countries to pursue independent economic policy paths without having their (fixed rate) currencies coming under attack and thus forcing them to change those policies.”

Source? He mentioned it in a lecture in 1972 and first published it in 1974, after Bretton Woods had broken down, and speficially has said he doesn’t support a return to fixed exchange rates

Surely the object of a tax system is to extract the maximum of feathers from the goose with the minimum of squawks. Hence taxes that appear to tax businesses are always and everywhere attractive to government, it does a lot to reduce the volume of squawks.

“Surely the object of a tax system is to extract the maximum of feathers from the goose with the minimum of squawks.”

Err, no. The object of a tax system is to pay for the functions of government that have to be done collectively. The goal ought to be to keep to a minimum the tax taken. This automatically reduces the squawking.

As Sir Humphrey said to Jim Hacker – The treasury doesn’t work out how much Government aims to spend and then raise taxes, it works out the maximum it can take and then spends it – or words to that affect.

That’s why green taxes and the Tobin tax are so popular, they are seen as new sources of income, not as a way of shifting the tax burden.